Sabra Health Care REIT Inc

NASDAQ:SBRA

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Sabra HealthCare REIT Fourth Quarter 2017 Earnings Conference Call. This call is being recorded. I would now like to turn the call over to Michael Costa, EVP Finance. Please go ahead, Mr. Costa.

[Michael Costa, EVP, Finance]

Thank you. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition, disposition and investment plans and our portfolio repositioning with certain legacy CCP tenants, our expectations regarding our future financial position and results of operations.

These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2017 that was filed with the SEC yesterday as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday.

We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid.

In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as explanation and reconciliation of these measures to the comparable GAAP results included on the financials page of the Investors section of our website at www.sabrahealth.com. Our Form 10-K and earnings release can also be accessed in the Investors section of our website.

And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra HealthCare REIT.

[Rick Matros, Chairman & CEO]

Thanks, Mike. And thanks everybody for joining us today. I'll go through my comments and then I'll turn the call over to Harold Andrews our CFO and after that we'll go to Q&A. So again, thanks for joining us we had an extremely productive quarter. We've executed our all initiatives following the CCP, Enlivant and North American transactions as we said we would.

We concluded the integration of the merger well ahead of schedule, we've now finalized our portfolio restructuring analysis lowering our worst case annual rent reduction from $33.5 million to $31.2 million with a new best case of $28.2 million. Our performance skilled nursing EBITDAR rent coverage will be between 1.38 and 1.40 all consistent with what we've been articulating. We completed the sale of 22 Genesis facilities and then execute LOIs on 76% of the remaining Genesis assets we intend to divest and I would remind everybody that we just started marketing at the very end of the year.

So, we've gotten really fantastic response for the prices that we anticipated and how we are getting stacked with more detail. With these and other asset and process our skilled nursing exposure would be reduced to 63% proforma from 74%. And I want to take a minute here to reiterate some of our long-term goals and look when we did the CCP merger we knew we'd get some push back on the increase in skilled exposure and we heard comments out there that we sort of did this about, so we never did in that phase.

Our long-stated goals have been from the day we did the spin to get to investment grade to diversify our incentive base and to increase our active diversification so we have more balance during skilled nursing and senior housing and potentially other asset classes. With the CCP merger and subsequent acquisitions at the live North American, we received our investment grade rating, we've diversified our tenant base pretty dramatically, and we were confident that the increase in skilled nursing exposure going from 57% to 74% will be temporary and here we are months later and it's 63% only 6% higher that it was prior to the CCP merger.

So, I would reiterate that we do everything that we said we were going to do were on record with those goals and we feel really good about where we are and I've asked everybody to think about where we would be if we had stood with one operator having 33% of our revenue exposure with all the request and compromises that we've had to make with that operator. We'll be in a pretty tough spot right now. So, we're pleased to be in a spot where we're actually stronger as a credit, then we have ever been since the inception of the company.

We closed the Enlivant JV transaction but additionally to closing the JV transaction, we acquired 100% of 11 of the facilities at a discount for the option price of the business three-two and that from our perspective is a reflection of the growing partnership and the strength of that partnership that we have with both Enilvant and TPG and we look forward to growing with both of those organizations on a go forward basis.

We also closed the last two facilities that were part of the North American transaction, we executed purchase options at two facilities in our proprietary pipeline and a 9.5% cash yield and a 7.5% cash yield. So, we've got more of that coming in over the course of this year how we'll comment on that as well.

I want to comment now on Signature, I know that's foremost in everybody's mind. So, we have an agreement with the other primary landlords of Signature. The one remaining items is the negotiations with the net now guys, those negotiations have actually been progressing really nicely.

So, I'm still a little bit cautious, but right now we are more optimistic than we have been at any point in time that if the negotiations with the net now guys continue the way they are progressing currently that there's a really good opportunity to get Signature restructured outside of the [ph] so we can put this behind us sooner than later.

Again, it's depended upon on how those negotiations continue to go, but based on where we are now we are hoping that we can bring that to a conclusion.

We move on to our acquisition pipeline. Our acquisition pipeline is currently approximately $850 million almost exclusively senior housing assets. The competition is where it's been on the senior housing side, private equity is still for a lot of money deals we are continuing to see busted deals and some recycled deals that hasn't yet translated into any expansion of cab rates and so it remains a very competitive environment, it pertains to the PE's on senior housing and that competition is really very specific to what someone selling the business.

If someone is selling their business then it's going to go to the highest bidder and they are always the highest bidder, we know how competitive any of us want to be and look to have an IR model that would lever us and then we've got the added issue of what's happened to equity on our end as well.

So that said, it's a triple net or even the ideal situation where the operator wants to stay in they tend to never want to do a deal with the PE and I'll take a more reasonable price from our perspective in order to have someone like Sabra as their capital partners opposed to private equity fund. So, we'll see, we're assuming a lot of things and we'll see what happens on that.

In terms of skilled nursing, we see very few opportunities now in terms of the acquisition opportunities. We don't see, we see very little private equity in skilled market and actually really only one private equity and that happens to be one of the buyers for Genesis skilled nursing asset.

Despite the fact that we don't see very many acquisition opportunities on the skilled nursing side, the appetite for buyers to acquire skilled nursing assets remains unabated and we get unsolicited offers on a very competitive basis on skilled nursing asset in our portfolio on almost a weekly basis, so we'll continue to access the direction that we want to go and that's another opportunity for us to more quickly get our skilled nursing exposure back to where it was prior to the CCP merger.

Let me move now to our operational results, our same-store skilled transitional care EBITDAR rent coverage was slight down sequentially from 1.51, 1.46 and as noted on prior calls we're not going to go higher than 1.5 coverage in this particular environment that we're in. So, we would expect those coverages to fluctuate around where they are, so we don't see any particular trend there, it's just going to fluctuate around the margins we think the remainder of this year and hopefully starts to see some turn upside at some point in 2019 as the initial entry of the new sort of demographic starts hitting the skilled nursing facilities.

Our same-store occupancy was down 88.5% from 87.4% with the skilled mix of 39.8% that was down to 41.9% sequentially. At just about 40%, that's very very strong skill mix, we feel good about that. The skill mix of that level creates tremendous front door activities. So continuing sort of the challenge to keep your admission up, so you can maintain that skill mix somewhere around that level and for the operators in our portfolio they've been able to do that so we feel obviously really good about that or same-store senior housing EBITDAR rent coverage at 1.23 was down from 1.32 sequentially, occupancy is at 88.3% from 88.5% sequentially so relatively flat.

And only one of our top 10 tenants has week coverage and I'm not referring to holiday and I feel like I always need to remind everybody on holiday that this is an IL investment, independent living investment. The coverage for holiday is exactly where we unloaded at. The margins of the business continue to be strong at 40% EBITDAR margins, so it's the tenant we really [ph].

So, we have really just one sniff tenant that got week cover, so if you're really great about our top 10 and that particular tenant we can check right now that the patient with them because they've got a lot of low hanging fruits, we've done a pretty deep dive on their business initiatives, they brought some new executives in. So, we're content to sort of wait that one out a while and see how they do.

So, with that, I'll turn it over to Harold and then once Harold is done we'll go to Q&A.

[Harold Andrews, CFO]

Thanks Rick. Thanks everybody for joining the call today. I'll walk through the financial highlights from the quarter and let's spend a couple of minutes providing an update on the CCP portfolio repositioning, the Genesis asset sales, our 2018 outlook and then make a couple of quick comments on the recent Genesis press release.

For the three months ended December 31, 2017, we recorded revenues and NOI of $166.5 million and $160.5 million respectively compared to $61.8 million and $60.3 million for the fourth quarter 2016. These increases are due predominately to revenues and NOI generated from the properties acquired in the CCP merger. On a same store basis, cash NOI increased from $46 million to $47.7 million an increase of 3.7%.

FFO for the quarter was $106.8 million and on a normalized basis, after the exclusion of $1.6 million of CCP merger and transition related costs and $9.3 million charge against provision for doubtful accounts and loan losses was $117.9 million or $0.66 per share. This normalized FFO compares to $40.6 million or $0.62 per share of normalized FFO for the fourth quarter of 2016 a per share increase of 6.5%.

AFFO which excludes from FFO expense merger and acquisition costs in certain non-cash revenues and expenses was $106.6 million and on a normalized basis after the exclusion of $0.7 million of CCP related transition costs and $0.4 million attributed to the recovery of previously reserve cash income was $107.1 million or $0.60 per share. This compares to normalized AFFO of $35.7 million or $0.54 per share in the fourth quarter of 2016, a per share increase of 11.1%.

For the quarter, we recorded net income attributable to common stockholders of $101.4 million compared to $20.6 million for the fourth quarter of 2016. Our G&A cost for the quarter totaled $8.2 million and included the following $0.7 million of CCP related transition costs. $1.3 million of operating costs for health trust, the valuation firm acquired in the CCP merger and $2.5 million of legal audit and tax fees.

Recurring cash G&A excluding CCP transition costs were 4.7% of NOI for the quarter in line with the prior quarter. We expect our quarterly recurring cash G&A run rate to be approximately $5.3 million to $5.6 million per quarter. During the quarter, we incurred charges totaling $9.7 million to provision for doubtful accounts and loan losses primarily related to the write-off of straight-line rent that's associated with transition of certain assets under new leases. We incurred no specific reserves related to rent per loan payments during the quarter.

Our interest expense for the quarter totaled $32.2 million compared to $15.7 million in the fourth quarter 2016 included in interest expense is $2.5 million of amortization of deferred financing costs compared to $1.5 million in the fourth quarter of 2016. As of December 31, 2017, our weighted average interest rate excluding borrowings under the unsecured revolving credit facility and including our share of the Enlivant joint venture debt was 4.04%. Borrowings under the unsecured revolving credit facility bear interest at 2.81% at December 31, 2017, an increase of 34 basis points over the third quarter of 2017.

We recognized a $47.4 million net gain on sale of real estate during the fourth quarter associated with the sale of 28 facilities, 22 of which were operated by Genesis. These sales provided total gross proceeds of $140.9 million. During the quarter, we made $26.6 million of incremental investment in two assets transition from loan and preferred equity investments as part of our proprietary pipeline to our stabilized real estate portfolio. One asset being a senior housing facility with initial cash lease shield of 7.5% and one being a skilled nursing transitional care facility with an initial cash lease yield of 9.5%.

Subsequent to year-end, we invested in additional $533.8 million to close on the Enlivant and two remaining North American healthcare assets. These investments were funded with cash held as of December 31, 2017, and borrowings under our revolving credit facility. As of December 31, 2017, we had total liquidity of $877.4 million comprised of currently available funds under revolving credit facility of $359 million and available cash and cash equivalents of $518.4 million proforma liquidity after taking into consideration investments made subsequent to year-end totaled $343.6 million.

We were in compliance with all of our debt covenants as of December 31, 2017, and continue to maintain a strong balance sheet with the following proforma credit metrics which incorporate among other items aggregate CCP and Genesis rent reductions of $47.2 million and investment activity concluded after year end. Net debt-to-adjusted EBITDA at 5.49 times, net-debt-to adjusted EBITDA including unconsolidated joint venture debt 5.94 times, interest coverage 4.2 times, fixed charge coverage ratio 3.8 times, total debt to asset value 50%, secured debt to asset value 8%, and unencumbered asset value to unsecured debt 220%.

On February 5, 2018, our board of directors declared a quarterly cash dividend of $0.45 per share of common stock. The dividend will be paid on February 28, 2018, to common stockholders of record as of the close of business on February 15, 2018, this dividend is well covered at just 75% of our fourth quarter 2017 normalized AFFO per share.

On February 5, 2018, our board of directors also declared a quarterly cash dividend of approximately $0.445 per share of Series A preferred stock, dividend will be paid on February 28, 2018 to preferred stockholders of record as at the close of business on February 15, 2018. Switching gears to talk about the CCP portfolio repositioning. I'd like to start off by saying we've completed our evaluation and opposed to the initial estimate of $33.5 million long-term impact on rents, we now anticipate a total range between $28.2 million and $31.2 million with only a handful of tenants wanting a rent reduction.

Already captured in the reduced estimate of $28.2 million is the annualized impact of a $5.6 million rent reduction reflected in our earnings referred in the fourth quarter of 2017. We will make a determination regarding utilize some portion or all of the remaining $3 million of rent relief as we continue to monitor the performance of certain tenants throughout 2018.

In addition, we have identified for sale in 2018, 10 properties operated by five different tenants estimated to generate approximately $58.8 million of gross proceeds which we expect will largely offset the $5.5 million of current annual cash wins for these properties once redeployed. However, we cannot accurately predict at this time, the timeframe between receiving proceeds and the subsequent redeployment to replace the lost rents. This temporary reduction of rent from asset sales is consistent with our previous expectations and noted in our prior discussions.

Moving on to Genesis asset sales, we've made great progress towards reducing our exposure to Genesis. This discussion in the disclosures in our press release no longer make any distinction between the multiple agreements we have with Genesis to sell various properties under various terms. Rather, we will now refer to the Genesis portfolio in its entirety to aggregate and simplify the presentation.

We currently have 54 facilities leased to Genesis contributing annual cash rent of $51.2 million net of the $19 million rent reduction we provided the genesis effective January 1, 2018. Of these 54 facilities, we have identified eight contributing $10.4 million of annual cash rents that we will retain to continue leases arrangements with Genesis. This continuing genesis rent represents less than 2% of our proforma annualized cash NOI. Of the 46 facilities being marketed for sale, we have executed purchase and sale agreements for six in letters of intent for 29. These 35 properties under contract generate $30.8 million of annual cash rents that are expected to generate total sales proceeds of $297 million.

25 of these 35 facilities are aggregated into three portfolios and are being sold at a 9% lease yield, and a 1.4 times EBITDA coverage. These portfolio sales are expected to trigger residual rents to us of $5.2 million per year for the following 4.28 years as provided for in our agreement with Genesis. Remaining 11 facilities, not currently under contract with $10 million of annual cash rents are expected to be sold in 2018 generating sales proceeds of approximately $70.7 million.

We have previously estimated the evaluation range for $425 million to $475 million for that final group of 43 assets we announced last fall to be marketed for sale, which excluded the 11 facilities we had previously announced we were selling. Now we intend to keep 18 facilities in their final group along with receiving residual rent in excess of our earlier estimates. These facilities and excess residual rents are valued at approximately $118 million as such the current expected value of those 43 facilities we originally intended to sell is between $440 million and $450 million approximating the midpoint of our prior estimates.

We expect all these sales will occur over the remainder of 2018 that was currently under contract to be completed by the third quarter. Ultimately, we expect to have total continuing cash from Genesis including residual rents generated from sold assets of approximately $19.5 million or 3.4% of our proforma cash NOI.

A few comments related to our 2018 updated outlook. First it includes the following, all completed acquisitions to-date plus approximately $202 million of additional investments related to our proprietary pipeline and an incremental investment in the Signature behavior hospital portfolio and other committed investments. With such additional investments having an estimated weighted average initial cash yield of 8.2%. The CCP portfolio repositioning in Genesis asset sales previously described are also included in guidance.

And finally, capital markets activity consisting of retiring our preferred equity in the first half of 2018 and refinancing our $500 million 5.5% senior unsecured notes due 2021 and our $200 million 5.375% senior unsecured notes due 2023 are expected to be refinanced during the second half of 2018. We'll also be opportunistic in reinstating an ATM program for match funding acquisitions. We have no set timetable for doing so and it's not something we currently need to pursue giving the significant asset sale proceeds we expect to receive over the course of 2018 that we can reinvest in acquisition opportunities that will arise.

We currently don't expect to pursue reinstating a program until we see a significant recovery in our cost of equity as compared to many of our healthcare REIT peers. Our normalized FFO per share outlook remained essentially unchanged with the range of 2.48 to 2.56 per share while our normalized AFFO per share outlook at the midpoint declined $0.04 or 1.7% to $2.28 to $2.36. As I noted in your assumptions for the 2018 outlook, we have a lot of moving pieces including expected asset sales of $532 million and total expected investments of $202 million for which timing is hard to predict. As such we have increased our outlook range from $0.06 to $0.08 per share.

Furthermore, we have made some changes to our assumptions which lowered our range including increasing the amount of non-Genesis asset sales by approximately $40 million delaying time and slightly reducing the expected interest savings from our bond offering in 2018 and increasing our recurring cash G&A cost run rate assumptions by about $3 million for the year to account for higher estimated professional fees, labor costs and taxes.

Offsetting these reductions in normalized FFO, with certain changes to the final purchase accounting for CCP that are excluded from normalized AFFO. And finally, just a quick comment on the recent Genesis press release. The announcement highlighting the $70 million of additional liquidity from new and expanded loan commitments and the $54 million of annual lease reductions which included the $19 million from Sabra is a very positive step for Genesis's stressed capital structure. You will note in our proforma coverage disclosures of fixed charge covers for Genesis of 1.25 times, this coverage includes the proforma effect of the new financing commitments and restructuring plans discussed in that press release.

These positive developments provide us with a strong rationale for our decision to retain eight high quality assets leased to genesis. It has been as Rick said a long-stated goal to reduce our exposure Genesis to a prudent level and with the sale of currently under contract and excluding the sale of the remaining 11 assets not under contract, we will have accomplished that goal with Genesis at approximately 4.5% of our total proforma NOI.

And with that we'll open it up to Q&A.

[Operator]

[Operator Instructions] Our first question comes on the line of Smedes Rose of Citi. Your line is open.

[Rick Matros, Chairman & CEO]

Hi Smedes.

[Smedes Rose, Citi]

Hi. How are you.

[Rick Matros, Chairman & CEO]

Very good.

[Smedes Rose, Citi]

Lots of moving pieces in your outlook and lots of detail there. But I just wanted to ask a couple of kind of overview questions. On page 15 of your supplement where you provide the EBITDAR coverage by segment proforma. So, to ask what percent of your portfolio or I guess the company-wide EBITDAR is covered by those coverage metrics, I know some of them you don't include if there is a corporate guarantee attached?

[Michael Costa, EVP, Finance]

Yes, so the way I like to think about and this will answer your question and we can get you the exact number. But if you look at our top 10 portfolio that's covering about over 60, about 62% of our NOI in the top 10. There is a handful of those in the top 10 that are also included in those coverage numbers. So, we'll get you the specific number of what's included but it's probably 70% or so. And the other thing I want to point out this is a question that I get a lot, how much of our NOI is non-stabilized and are non-stabilized is only about 8% of our NOI and covers again, we define stabilized assets that are actually being transitioned to new operators or new acquisitions that we have.

So, we'll get you that Smedes in a second the specific number, but we do disclose about 65% on a specific asset-by-asset basis.

[Smedes Rose, Citi]

Okay. And then I think you said, you guys are looking at about a pipeline around $850 million on the senior housing side. So, is that primarily, in the triple-net side of the business are you looking at RIDEA, more RIDEA assets or will Enlivant be kind of your only venture there?

[Rick Matros, Chairman & CEO]

So, it's primarily triple-net. Our view on RIDEA as everybody I think knows has never been a strategy bars to pursue RIDEA as an operator but the key there really is if we're looking at an asset to acquire on a RIDEA basis, it's got to be in early stage where there's a lot of runway ahead of it. So, if you think of that when most of the larger RIDEA deals were done, they were done sort of in the 2012, 2013, time period when senior housing occupancy was really ramping up and even through shop relative slowed for some of our peers if you look at the returns from inception, it's actually been quite good. So that case of Enlivant because they are close to the performance yet, there was an opportunity to ride it.

So, another way to put it in, we would not look at acquiring a stable portfolio on a RIDEA basis. It's got to have it.

[Smedes Rose, Citi]

Okay. Thank you.

[Operator]

Thank you. Our next question comes from the line of Juan Sanabria of Bank of America. Your line is open.

[Rick Matros, Chairman & CEO]

Hi Juan.

[Juan Sanabria, Bank of America Merrill Lynch]

Hi, good morning. Just a question I guess I apologize Harold if you went through this in your very detailed commentary. But is the 28 to 31 in rent cuts that you now feel comfortable with. What if anything was flowing through the fourth quarter in which the timing of when that gets effectuated is with regards to your 2018 guidance?

[Harold Andrews, CFO]

Yes. So, we did have some flow in the fourth quarter for a couple of tenants. On an annualized basis, that would be up a little over $22 million. And so, the rest the remaining difference between $28 million and $22 million about $6 million bucks is going to be flowing through effectively January 1.

So, the full $28.2 million will be fully baked in, but $22.2 million was baked in the fourth quarter already.

[Juan Sanabria, Bank of America Merrill Lynch]

Okay. And then with regards to the Genesis sales that happened in the fourth quarter on the 22 assets. What was the NOI that flowed through in the fourth quarter or however you want to describe it to get a kind of a clean run rate as to think about the numbers for the first quarter for those just those 22 assets?

[Harold Andrews, CFO]

I have to take a look at that, I don't have it on top of my head. Want to look at that for you shortly. The way about going into 2018 is we've got the 54 assets that are representing the $52 million of revenue so that's your best starting point for where we started January and then those assets will start to be sold with a $10.4 million plus the $5.3 million of residual rent continuing for the full year.

[Juan Sanabria, Bank of America Merrill Lynch]

Okay. And then I notice you guys published an NAV kind of the building blocks there. How are you guys feeling about kind of where you are trading relative to how you see private market values and any thought about looking at a buyback instead of pursuing the seniors housing acquisitions which I had assumed would kind of be [ph] type cap rates or any thoughts there?

[Rick Matros, Chairman & CEO]

Yes, when I say that we've got so much coming in proceeds we don't have this worry about where stock is right now, but look it's in no rational universe should we be trading at close to distress levels which is where we are. Just makes no sense, so hopefully as the story continues to unfold and despite all the questions or concerns about the ability to integrate and execute I think we're amply demonstrating that we have no issues there. We have tremendous capacity here you do that.

So in terms of a buyback specifically, we have looked at that we got to pull it out as we discussed it with our board and the amount of [ph] you get by doing a buyback is pretty negligible and we just serve to increase our leverage and we're really mindful of being investment grade now and staying there and everything that we've done over the past six months or so as we transform the company has always been previewed with the agencies, so that we were comfortable that we weren't doing anything to get really in jeopardy and I think everybody saw with Fitch and S&P that they put out notes at the end of 2017 and early 2008 affirming their outlook and be ready to begin.

So, obviously no one knows where this market is going to go in terms of the equity side, but we should perform better at least on a relative basis given the current discount that we're trading and certainly some of the guys that cover us have been working that out and we appreciate everybody is working that out, but we appreciate with the support that we're getting.

[Juan Sanabria, Bank of America Merrill Lynch]

Thank you.

[Operator]

Thank our next question comes from the line of Michael Knott of Green Street Advisor. Your line is open.

[Unidentified Analyst]

Hi, this is Andrew filling in for Michael Knott. Looking at the senior housing operating it seems like 18 is going to be a tough year as some of your peers are guiding to negative growth. But with Enlivant being in slight different markets can you talk a little bit about what's your forecasting for this year and your assumptions on the changes for the occupancy?

[Harold Andrews, CFO]

Well for Enlivant, as I noted they are at a different spot. I think others maybe forecasting like growth or negative growth because they really maxed out some time ago and maybe we are in the slow to mid-90 percentile and that's not the case with Enlivant. So, we haven't put out a specific forecast for Enlivant nor will we. But suffices to say that we don't expect any negative growth, we continue to see that. We continue to expect that portfolio to ramp up.

[Unidentified Analyst]

And for the bond issuance, it has been pushed out from '17 to '18. Can you talk about what has changed an what's your target pricing is?

[Harold Andrews, CFO]

Well, I think what changed is a couple of things. One, we have a peer in our group that is a strong comp for us and they were trading wider which affected us and so we have, there is no rush for us. We don't have to do this now, we don't even have to do it this year. So rather than go out and do, and take out the old notes with new notes where there was more risk involved, we believe that we're better off outstanding PAT and waiting for spreads to tighten up a little bit and also give us the opportunities.

We continue to execute and continue to decrease our exposures filled nursing that comp will no longer be as effective as it is now which will accrue to our benefit.

[Unidentified Analyst]

Okay. Thank you.

[Operator]

Thank you. Our next question comes from Rich Anderson of Mizuho Securities. Your line is open.

[Richard Anderson, Mizuho Securities USA]

Thanks. Good morning out there. Are there any more changes, I know you changed the sort of the worst-case scenario rent reduction CCP but are there any changes about you get there because there are going to be more asset sales or anything like that or is it basically all rent release?

[Rick Matros, Chairman & CEO]

There is no change in the assumptions. Now that we've had some of those operators under our umbrella for a longer period of time, we've done really deep dives. Bill Mathies has joined us to do some work on the portfolios, so we've done pretty intricate operational assessment and as you know Rich given our operational background certainly mine and some of our asset managers and certainly Bill's it's beneficial to us.

So, it really just is a function of understanding where we are at looking at their business plans, watching their trends, watching how they start to execute their response to us in terms of the feedback that we've given them which they have been really open minded about. So, it's really just those kinds of things that led to the reduction in the assumption.

[Harold Andrews, CFO]

Yes, Rich just to add to that. I just want to remind you and everybody that we did anticipate some assets sales as part of that process. In my commentary, you heard me speak about 10 assets that we are selling, we're not basically staying flat where we originally expected and we will see some weight go away from that then we'll be replaced, but all consistent with what we had previously.

[Richard Anderson, Mizuho Securities USA]

Okay. Yes, that 58. I dint connect the dots that was CCP stuff. All right. Rick, HCN is becoming more dovish on their process with Genesis, you guys are continuing on basically selling almost everything not to speak for their strategy but why you wouldn't you maybe still own more than eight assets given the lifeline that they're getting and all the rest and the potential that ultimately that this could all work out for them longer term. Have you given any thought doing that a little more than?

[Rick Matros, Chairman & CEO]

Yes. So, without commenting on anybody else's strategy because it's not correct to do so. I would say that it's great that they've gotten the release that they've gotten. All that's done is put them in a better position to hopefully completely restructure the company, the company has to be restructured. The current business model does not work. You can't run a company with 500 buildings or 450 buildings in this environment. In fact, you could never run a company that size in the skill nursing space ever even in a much simpler time.

So, from our perspective they simply can't compete with the kinds of operators that we have in our portfolio and so maybe six months from now. And look, I know they were addressing sort of the next step, it's possible. As Harold mentioned we have 11 assets that aren't under contract yet, and if they come out several months now and announce some additional restructuring that we think will make them more effective operator and fit the profile of the operators that we want to align ourselves with.

Then maybe we'll think about keeping some of those that currently are under contract but that would only increase our exposure from 2% to 4.5%. So, we still prefer smaller operators, we drove operators that are much more numeral on the ground then they are and I want to stress, we think they are good operators. We think they are good guys, we just think too much and again that's really tough. When you are an operator and the other point I would make and I think this is important.

Obviously, Brookdale made their announcements so they are going to be around for a while, I pray that they are out of their public stock [ph]. Medicare probably won't be visible at some point, and we'll see what happens with Genesis. But I think that in terms of when you all look at the space more and more, it's going to be the reset really represents the space. When you look at the number first tenants that we all have, we represent the space.

And so, I think it's incumbent upon us, we have a responsibility to make sure that we are aligned with the best operators so that you've got a much better and broader perspective and it isn't going to be 10 mines and a few operators or maybe some water operated that really don't represent the business any longer and that sort of drives sentiment about the industry. And we take that and I want to settle for the high flying here and all that, but actually take that responsibility really seriously and when you when you look at our top 10 and you look at our percentage on statewide assets that's a pretty good place to be that we've gotten through relatively quickly to close the CCP deal.

[Richard Anderson, Mizuho Securities USA]

Okay. And did you give any thought to as long as you are going through the process of CCP and running around the country reviewing and evaluating to do the same with senior care just to address that in the quick fashion that you often do or why wait it out a little bit with them?

[Rick Matros, Chairman & CEO]

It's a good question and I have quoted in my initial remarks, they are obviously the one operator that stands out that doesn't have strong coverage. Our analysis of that portfolio is that unlike some other operators that are doing pretty good job and they just have certain headwinds in their markets whether it sounds like that they are wages or whatever and the case is senior care because it had so much turnover in management there. So, it's a ton of low hanging fruit there that should be relatively easy sixes. They board a new COO and who we know we brought him into the office and went through everything in detail with him.

I have Bill Mathies send one out to their corporate office in Texas and ran through everything that they were doing and so at this point, we think that we can wait a little while. We're not going to wait two years or probably even a year. But we are going to wait a little while to see if they progress the way we think that they can progress.

And if they can great. And there are other solutions out there that we are prepared to take.

[Richard Anderson, Mizuho Securities USA]

Last question, do you think you in the next year or two you could fly past below the 57% skilled nursing exposure you had prior to CCP or where is your happy resting ground on that break out of the 50:50?

[Rick Matros, Chairman & CEO]

Yes. I know, we want to get closer to 50:50 but in terms of getting that we're only 6% above it right now. So, we're down from 17% to 6% in months, so I don't think it's not going to take us two years and so I would expect that we're going to be pretty close by year end this year.

[Richard Anderson, Mizuho Securities USA]

Okay. Thanks very much.

[Operator]

Thank you. Our next question comes from the line of Chad Vanacore with Stifel. Your line is open.

[Chad Vanacore, Stifel Nicolaus]

Thanks. I might have missed this one. On your rent cut that you previously outlined, it looks like you are better than expected by $3 million to $5 million. So what factors were in the improved expectations. And then, you said something in the prepared remarks about having $3 million left to allocate?

[Rick Matros, Chairman & CEO]

Yes, so we gave ourselves some cush there in case we wanted to us a little bit more but basically, it's really what I just said in the previous questions; and that is, we've had those operators in our portfolio for a longer period of time, now we've got really deep dives operationally, we've brought additional expertise into the management team to spend time with those operators. And so as we've spent more time and got to know them better and trying to executing on certain components of their business plan and lock some of the trends, we've felt really comfortable that we didn't need to do quite as much as we did before, and we don't want anyone to ever be concerned about another shift dropping and that's why we're giving ourselves some cush with the other three.

[Harold Andrews, CFO]

Just to add to that really quick; if you remember going back when we came up from the $33.5 million, it was a pretty high level analysis before we did a deep dive that Rick's talking about and it was really based on getting the tenancy of below one time's coverage upto 1.1 plus getting Signature upto 1.3. And so as Rick says, we've done the deeper dive. Some of those tenants are below that 1.1 threshold but we're comfortable with where they are at and there is a couple that we're going to wait and see what happens with them. And there is also a tenant that's -- shorter term tenant, the lease expires here at the end of the year, so there is no reason to give a rent cut for alternative expiring, we'll deal with that when that time comes.

[Chad Vanacore, Stifel Nicolaus]

And Harold, are we seeing all those rent cuts in the first quarter or use some roll in through the year?

[Harold Andrews, CFO]

Again, about $22.2 million on an annualized basis were already reflected in our fourth quarter numbers and then a full $28.2 million you can expect to be in the numbers effective January 1. And then any additional amounts of that $3 million we talked about -- we haven't made any decision, if at all, we will even use that.

[Rick Matros, Chairman & CEO]

I remember in the last quarter, we saw net bookings of certain tenants on a cash basis like Signature.

[Chad Vanacore, Stifel Nicolaus]

On your pipeline, it looks like you're looking to invest $120 million in 2018; how should we expect these cash flows for investments to come in through 2018 and 2019?

[Harold Andrews, CFO]

So the investment that we're talking about is primarily assets that are currently in our preferred equity portfolio or loan portfolio, stabilizing and thereby treasuring the purchase option to come into our real estate portfolio. And this spread pretty evenly throughout the year, it's not a big chunk but I'd say it's probably slightly backend loaded for 2018.

[Operator]

Our next question comes from the line of Daniel Bernstein of Capital One Securities. Your line is open.

[Daniel Bernstein, Capital One Securities]

Normally I don't say great job but I think you guys had good execution here. On the flipside, I'm going to play a little bit of Devil's Advocate and I agree with the demographics that everybody talks about but how do I reconcile potential occupancy increase versus some of the wage growth we see out there in SNFs and maybe seniors housing? And also the kind of limit on the market basket we've seen on Congress [ph]. When you talk to your SNF operators and you think about the outlook for the SNF industry for the next couple of years; how are you thinking about that occupancy versus expense growth?

[Rick Matros, Chairman & CEO]

I think that there are couple of things. Our skilled operators are actually pretty comfortable as they look out over the next couple of years. I think on the demographic piece, as -- and one of our peers on their earnings call talked about in detail that they actually have infrastructure in place around this modelling, I think that they are -- the basis they are modeling is really good, we don't have an infrastructure, we access information from the trade association which has good data points and some other third-party vendors that do really good job of projections. And so we agree that we'll start to see sort of 75 plus crowd, some increase in occupancy starting at some point in 2019 and there is no big wave coming in as we all know, it's just going to start trickling in but here are the way to think about it.

If the industry is at 81% or 82% occupancy and you've got on average 100-bed buildings, getting one or two more patients then your cost are fixed. Go back straight to the bottom-line, it provides pretty strong relief, relatively quickly. So when you think about the wage issue, the thing about the wage issues is, they happen to nearly change very much, there have been wage issues for the entire time I've been in the business because there has been a nursing shortage and a therapy shortage for the last 35 years. And the issue really is that, with length of stays coming down and therefore occupancy coming down, the impact of that wage pressure becomes disproportionate. So the way we think about it is, if we -- if you want to add a couple of percentage points to your occupancy knowing that there are no cost associated to that, you've got some really good leverage there to impact or to mitigate the impact of those wages.

And I would also point out that the wage increases are really market specific, we are in very sensitive markets that we're seeing more wage pressure than others, we have pretty significant of our portfolio that's in secondary and tertiary markets where you don't see the same wage pressures but that's kind of highlighted to you.

And I think there are two other dynamics to think about relative to this nursing industry. You're going to continue to see a decline of supply and that comes from both modernizing facilities, when we look at our existing operators that do renovations or when they do acquisitions, I mean it's very much so when they acquire model pots [ph], who then acquire of shutting some of their doors, so you will have some decrease there as well. They take beds out of service, they want to have more private and semi-private rooms to accommodate today's customers. They build bigger dining rooms, they build bigger gym, they have more common space; all that reduces the number of beds and you've got about 1.5 million beds and that's going to come down I think pretty dramatically over the past few years. So it's going to be a good dynamic I think of some slight increase in occupancy combined with a decrease in supply.

And then the other piece of it that I think is really critical is; if CMS gets the design right and obviously we're hoping they will on the RCS1 system where there is a greater incentive for operators to go after complex nursing patients; those complex nursing patients have a much lower length of stay than the short-term rehab patients that the industry historically has been focused on. We just try to do this with [indiscernible] we all know how that turned out but this time they worked with the industry on the modelling to try to get it right and we have operators in states currently that have really strong Medicaid business to get patients out of hospitals and higher in settings or even L-Tax [ph] once those patients come off Medicare and they pay an equivalent rate through Medicaid. And so those operators in our portfolio do a lot of complex nursing and talking then different kind of pulmonary patients, out patients and they have no length of stay issues because the length of stay is so much longer in those patients that it mitigates the shorter length of stay on rehab patients.

So occupancy increases are not just going to be a function of the demographic improvement, it's going to be a function of decrease and supply; and then when the RCS -- once it gets rolled out which I don't see it happening this October although that's still something that CMS talks about, I think probably October 19 is a more realistic timeframe to that.

And the other I'd point out about the RCS1 system that seems to go unnoticed is the rehab is not going to be built by minutes [ph] any longer. And if you look at every DRJ destination, it's all based starting the assumption that people are somehow according to gaming the system on the minutes and billing everything to ultra-high and very high, and all that's going away. So even though the DOJ investigation haven't hit a lot of providers, the headlines and the impact on the industry obviously has been pretty negative. So that's going to really help in that regard too; that maybe more than you are looking for.

[Daniel Bernstein, Capital One Securities]

No, I mean -- you know the industry really well, so whenever I open up Pandora's Box it gives you the floor. Actually there is one real quick question to it, just real added to that; I mean you don't have that much construction in your portfolio -- and really the sizing of your portfolio and it seems like there is, if the industry is going to be more towards complex care there needs to be a lot of CapEx put into some of the buildings where you have a new construction come into the SNF's base. Do you see any opportunities or are you working on any opportunities to put some more CapEx into your operators and maybe do some more development?

[Rick Matros, Chairman & CEO]

I don't see much in the way skilled nursing development. In Texas there is quite a bit because you can do whatever you want in Texas for less money and without regulations. But that's not that much of an exaggeration actually but outside of Texas, it's so regulated, it's so expensive. I had a conversation with someone yesterday who is actually opening up a new skilled nursing facility in California which is almost unheard off but it took them four years to get through the regulatory process. So, we -- just to extent and just in terms of work, and I think that's going to accrue to the benefit of the operators to get it right.

So in terms of CapEx investments on our existing portfolio, as operators were to modernize -- they know that we will do that as soon as they feel like they wanted to make the call and we have ongoing dialogues with them about that through our asset management team, so they haven't brought it out to us, we may actually may bring it up to them and say they think it's time that you start thinking about maybe do a little bit more modernization that you've done -- whatever that can tell, so it's possible that we'll have more opportunity there but it's going to be on modernization of existing assets and not on development of new skilled nursing assets.

[Operator]

Our next question comes from the line of Mateo Akusania [ph] of Jefferies. Your line is open.

[Unidentified Analyst]

Questions from my end; the first one is Signature. So you have dealt with the rent concession there but I mean they are still going through a bigger restructuring at this point; just curious what's kind of going on with the broader restructuring? And whether they can get all their parties together at the same way Genesis is trying to give them a sort of -- at kind of making it through the tough times?

[Rick Matros, Chairman & CEO]

Sure. So exactly, to meet now [ph] because those negotiations are ongoing. We already have an agreement in place, so it's us, it's Omega, it's a group called Harbor [ph] which provided the equity sponsor for Signature, they have about -- I think 6 facilities they hold leases on; so it's primarily us and Omega and then the lender on the line is CAP1 who has been very cooperative working with us as well. We already have an agreement that's potentially in place, we're just waiting to see if the med-mail [ph] guys are going to continue to be reasonable in the negotiations and if they are then I don't think we're that far from getting this done, we'll have to go through DK.

So there is no issues with us and major constituents; so that actually came together pretty easily.

[Unidentified Analyst]

But what is they are not willing to negotiate and you do have to go through the DK process; does that change anything about how we should be thinking about the overall impact of the Signature restructuring or Signature bankruptcy?

[Harold Andrews, CFO]

It won't change anything except that the bankruptcy will add a cost but those guys will get crushed. So that won't change anything in terms of what we have been recording or what we anticipate going forward and I might feel comfortable saying that, that -- I don't want to make any comments about any of our other peers; I think our peer in this case would feel comfortable saying the same thing.

[Unidentified Analyst]

And then the second thing; the residuals, the $5.2 million for the next 4.28 years, would you just remind us again how that works again?

[Harold Andrews, CFO]

Sure, no problem. The deal we struck with Genesis is, we gave them the $19 million rent cut, it set all those properties that are 1.3 cover at 4% management fee. We knew in our pre-marketing analysis that that was probably tighter covers than more buyers were going to be willing to accept. So when we agreed to give Genesis a $19 million rent cut, in addition to just getting their cooperation to sell assets we also put into the agreement that we will give them a rent reduction from those assets sales based on whatever the other -- they are going to have to pay the new landlord. So in this case, rents were cut and set at 1.4 coverage; so these new landlords are demanding less rent on these leases with Genesis and that dealt between the rent that they are paying us and what they are going to be paying the new landlord, that's what they have to pay us for the next 4.28 years. As I said, the once that are under contract, it's about $5.2 million and these are additional $3 million to $4 million we expect upon selling the rest of the portfolio.

[Unidentified Analyst]

Rick, back to the comment you made earlier on; you talked about pushing the bond deal because again, one of the comps you had up there was a SNF that was trading very wide from a credit perspective. And you thought your world would change this year with a lot of the senior housing assets you kind of had in the acquisition pipeline. Over the past 2-3 years, you've kind of gone back and forth and be coming skilled nursing heavy and then not skilled nursing heavy; and it kind of seems to go back and forth and I think it creates some confusion sometimes about exactly what Sabra wants to look like or be on a long-term basis.

So I guess, the question I have is; are you -- do you still consider yourself mainly a skilled nursing business? Do you want to become more of the half and halves like the LTCs and NHIs of the world? What's the vision of what really Sabra wants to look like over the next 3 to 5 years?

[Rick Matros, Chairman & CEO]

It is more balanced and I would say this, prior to the CCT deal we really didn't go back and forth, we're on a steady -- in terms of steady state reduction and reversing [ph] an increase in senior housing. Maybe we do the occasion of skilled nursing deal, it was a good deal but it really wasn't very much; if you look at the trajectory from 2012 when we first started gaining the senior housing through the spring of last year. And so in the case of CCT there was very specific opportunity that gave us some different strategic benefits as you know which included getting to investment grades and not having one tenant that can put -- drove the narrative of our entire company. And for us achieving those two things which had also been long stated goals has worked the increase -- it's down to the exposure because we were confident that we're going to be able to get that exposure down relatively quickly which we certainly have been doing.

We also felt that the new size of the company, that the improved credit of the company improved, and the facility of the company would allow us to be more competitive on senior housing than we had been and as we noted, without doing that deal we would never have gotten the deal done with GPG [ph] and in light it would not happen. So for us, there is always a one instant in time where we sort of gearing a little bit off of our trajectory and having a more balanced portfolio, and that was because of the strategic benefit that we got from doing that merger. And I would tell you that if we had any doubt that we would be able to continue to diversify our asset class, that would have given us, that can tell us about the merger but we are that confident that we would be able to continue on that path. I mean those are the kinds of decisions you have to make, right, and again -- look, we've prove it.

[Operator]

Our next question comes from the line of Eric Fleming of SunTrust. Your line is open.

[Eric Fleming, SunTrust]

I can follow with you offline, it's not that important.

[Operator]

Our next question comes from the line of Todd [ph] with Wells Fargo. Your line is open.

[Unidentified Analyst]

The lease coverage on Signature, I don't know if I missed this early in the call, it was sub 1x last quarter, now it's over 1.2x; any color there? And does this upward move get in the way of your restructuring at all?

[Harold Andrews, CFO]

It's actually a result of the restructuring, those are pro forma coverage which represents the rent adjustments that we're giving them. So they are still performing very strongly like they had been previously, there is no deterioration in their performance. It's been pretty steady state and they are paying their rent based on the adjusted rents that were provided to them, and so to show you once that's done we are going to be covering. On a historical performance basis, it's 1.26x; when you look forward to projections for 2018 we would expect it to pick up closer to the 1.3x area.

[Operator]

[Operator Instructions] Our next question comes from the line of Jonathan Hughes of Raymond James. Your line is open.

[Jonathan Hughes, Raymond James]

Rick, you mentioned the private equity is kind of out of the SNF acquisition market except for the one fund you're working with on the Genesis sales. Are there strategic buyers out there or any other REITs looking to fund expansions for their operators? I'm just trying to understand how deep the buyer pool is for the remaining [indiscernible].

[Rick Matros, Chairman & CEO]

The buyer pool really is deep and it was never a huge influx positive equity interest on the skill side. I mean if you consider formation on the private equity side, they've always benefited [ph] but outside the formation it hasn't been. And our experience is in with the foreign buyers that you could have really subset of conversations and you think you can get close but it doesn't necessarily happen. So the buyer pool is really -- there are operators on the ground, there are strategic buyers, there are finance sources that have been in and around the business that understand it, that see some of the upside that I outlined earlier and then really willing to make commitments. What's been interesting and a little bit different than we've seen before and we've seen this with the Genesis assets; we're seeing buyers out there who normally would like to operate that are willing to buy the real estate only and if that particular asset they are buying, if the operator is running it happens to fail then they totally [indiscernible] we get off for free or close to it.

So that's been sort of interesting to watch but it's -- I mean, if you think about -- we just started marketing this, I mean literally a little bit over a month ago and we have 76% of the assets under LOI [ph]. So it's pretty robust out there and the other way to think about it is, you can't think about sort of all those having all these assets out there in the market because when you look at it on a market specific basis over 50 states, it's really not that much on the market, and any given market. So in terms of the results, I think every one of our peers is willing to invest in their skilled operators and put CapEx into kind of whatever is necessary to grow that and I know that all of the operators that are aligned with all of us out there know that to be a factor, it's one of the advantages that we have and trying to get deals that as they know that we are sort of trying to capital partners that they can always count on.

[Jonathan Hughes, Raymond James]

I know it's still early in the legislative and rate setting process, but we've heard that New York and California may try to call back some of the tax reform benefit on the Medicaid managed care side. Do you see that as a longer term risk to your SNFs? Are they outlook for investments in those states?

[Rick Matros, Chairman & CEO]

We'll see how it plays out but one, our operators don't tune much any Medicaid managed care which is not happening in the skill setting. I don't even think it's -- we may not have any revenue from Medicaid managed care in our SNF operators, if it is, it's not even rounding and we see no trends there within the SNF population. So I'm not really concerned about it in those two states if it were to happen. But I also think that anytime they try to do something legislatively, the trade associations usually have really strong lobbying effort and really strong graphics to go along with that lobbying effort that tends to keep people in check. The politicians pay to be as in their districts with DMR [ph] being pushed over a cliff and those ads will get pulled out all over again.

[Operator]

Thank you. At this time I'd like to turn the call back over to Rick for any closing remarks.

[Rick Matros, Chairman & CEO]

Thanks very much. Thanks all for your time today. I know the call went a bit long but as everybody noted, we have a lot of things going on but I hope you all at least have a comfort level that -- and what may look to you like a lot of moving pieces and a lot to execute, for us it's just another day. So anyway, Harold and I are always available and look forward to talking to you on a go-forward basis, it's conference season, so we'll be seeing a lot of you at the conferences coming up. Thanks very much, have a great day.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.